When you borrow money for real estate, not all loans are created equal. Some put you personally on the hook, others don’t. Understanding the difference between recourse debt and non-recourse debt is critical — especially if you’re considering a 1031 exchange or investing through a Delaware Statutory Trust (DST).

Let’s break it down.

What Exactly Is Recourse Debt?

Recourse debt means the bank has more than just the property as security. If you default and the sale of the property doesn’t cover the full loan, the lender can come after your personal assets — savings accounts, wages, even other properties.

Think of it this way: if you borrowed $1 million to buy an apartment building and it later sells for only $700,000 after foreclosure, you still owe the $300,000 gap. The lender can legally pursue you to make up the difference.

Who gets recourse debt?
Almost everyone. Traditional bank loans — mortgages from your local bank, small-business loans, even lines of credit — are usually recourse. Individuals, not just institutions, sign for this type of debt every day.

It’s cheaper money (because the bank shifts the risk onto you), but it comes at the cost of personal liability.

What About Non-Recourse Debt?

Non-recourse debt flips the risk. With non-recourse, the lender’s only option is the property itself. If you default, they can foreclose, but they cannot pursue you personally for any shortfall.

For example, if you borrow $1 million on non-recourse terms and the property later sells for $700,000, the lender eats the $300,000 loss. Your personal savings and assets stay untouched.

Sounds too good to be true? The catch is that non-recourse loans usually come with stricter requirements and sometimes higher rates, because the lender is taking on more risk. They’re common in large commercial real estate deals and institutional financing — not in your everyday bank loan.

How Do Fannie Mae and Freddie Mac Fit In?

Fannie Mae and Freddie Mac are government-sponsored enterprises that help make mortgage markets more liquid. In the multifamily space, they often provide non-recourse loans.

Does that mean the U.S. government is directly on the hook? Not exactly. But because these agencies have an implicit government guarantee, investors are willing to buy their securities. That makes lenders comfortable issuing non-recourse loans under their programs.

Other sources of non-recourse debt include:

• CMBS (Commercial Mortgage-Backed Securities): Loans pooled and sold on Wall Street.

• Life insurance companies: For stabilized, cash-flowing properties.

• DST sponsors: Non-recourse financing is built into the trust, and investors step into their share without ever signing a personal guarantee.

How Do Recourse and Non-Recourse Loans Show Up on Your Balance Sheet?

• Recourse loans show up as personal liabilities. If you go back to the bank for another loan, they’ll count this debt against you.

• Non-recourse DST debt doesn’t appear on your personal balance sheet because you aren’t liable for it. But for IRS purposes, it still counts as debt that you must replace in future 1031 exchanges.

Why Does This Matter for Investors in DSTs?

Here’s the big takeaway:

• With recourse debt, you carry the risk. If the deal fails, your personal wealth is exposed.

• With non-recourse DST debt, you get the tax benefit of debt replacement in a 1031 exchange, without carrying personal liability.

That’s why DSTs are so appealing. You meet the IRS’s “equal or greater debt” requirement automatically, but you don’t sign your name on a loan.

Recourse vs. Non-Recourse Debt: A Side-by-Side Comparison

FeatureRecourse DebtNon-Recourse DebtLiabilityBorrower personally liable; lender can pursue other assets.Borrower not personally liable; lender’s only recourse is the property.Where it’s commonLocal banks, small business loans, residential mortgages.Institutional loans, CMBS, Fannie/Freddie, DST financing.Risk to borrowerHigh — exposes all personal assets.Low — risk limited to the property.Interest ratesUsually lower, because lender’s risk is lower.Often higher, with stricter requirements.Balance sheet impactShows up as debt and affects borrowing power.Does not appear on personal balance sheet (but counts for IRS 1031 purposes).DST contextNot used in DSTs.Standard for DSTs — investors step into their pro-rata share of non-recourse financing.

Bottom Line

Recourse debt is what most people live with: you borrow from a bank, you’re on the hook if things go wrong. Non-recourse debt shifts that burden to the lender.

For everyday deals, recourse is the norm. But for institutional-grade real estate — and especially for DSTs — non-recourse financing is standard. That means investors can defer taxes through 1031 exchanges, satisfy the IRS debt rules, and still keep their personal balance sheet clean.

It isn’t too good to be true — it’s simply a matter of who carries the risk. In recourse loans, it’s you. In non-recourse loans, it’s the lender.

And for many investors, that makes all the difference.

Disclaimer: DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and attorney. There are risks associated with investing in real estate and DST properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. These investments are not suitable for all investors. Tax laws are subject to change which may have a negative impact on a DST investment. This material is not to be interpreted as tax or legal advice. Investors are advised to speak with their own tax and legal advisors for advice or guidance regarding their particular situation. Diversification does not ensure a profit or guarantee against loss. Potential cash flows/returns/appreciations are not guaranteed and could be lower than anticipated. The information herein has been prepared for educational purposes only and does not constitute an offer to sell securitized real estate investments.